Markets News Report
December 21, 2023

The Bitcoin ETF Approval Dilemma: SEC Decision Expected in Early New Year 2024

In Brief

Major investment firms are optimistic about potential approval of first Bitcoin ETF spot in early January 2024, marking a significant moment in crypto history.

Bitcoin ETF Approval Evolving Dynamics, SEC Decision Expected in the New Year

Major investment firms are increasingly optimistic about the Securities and Exchange Commission’s (SEC) potential approval of the first “spot” Bitcoin exchange-traded fund (ETF) in early January, marking a significant moment in crypto history.

In recent guidance, SEC officials suggest that approval is likely to come by January 10, 2024, the final deadline for the SEC to decide on the application from the first firm seeking approval for a spot Bitcoin ETF: Cathie Wood’s Ark Investment Management in partnership with 21Shares.

Currently, approximately thirteen companies have applied for a spot Bitcoin ETF, valued based on the real-time price of the digital asset. These firms anticipate the SEC potentially approving multiple applications simultaneously.

If approval occurs, it would signify a major step toward mainstream cryptocurrency adoption in the US. The SEC Chairman Gary Gensler, has been reluctant about this until recently when the US Court of Appeals for the DC Circuit issued a ruling that restricted his authority in regulating crypto.

Bitcoin ETF Spot’s Essence for Retail Investors 

A bitcoin ETF spot would offer retail investors greater exposure to the world’s largest cryptocurrency at less cost compared to an already approved Bitcoin ETF priced off the futures market. 

Investors will get the exposure to Bitcoin avoiding an unregulated exchange by purchasing an ETF through highly regulated money management firms while trading occurs on the New York Stock Exchange and Nasdaq stock market.

However, there’s a drawback for investors due to an unusual SEC demand in the way the ETFs are structured. The SEC insists that applicants use cash to buy shares of the ETF, and cannot use the underlying asset, which in this case is Bitcoin.

In-Kind and Cash Create Dilemma 

Traditional ETFs allow “in-kind” transactions, enabling market makers to exchange Bitcoin for ETF shares. In contrast, the “cash create” approach necessitates ETF issuers to exchange Bitcoin for cash in each transaction—a more complicated process that requires the issuers themselves to buy the Bitcoin, not the broker-dealers. 

Another disadvantage of cash creation is the potential loss of a crucial tax advantage for investors. While “in-kind” purchases remain non-taxable, selling Bitcoin for cash before an ETF purchase would incur taxation.

But several spot Bitcoin ETF applicants, such as Grayscale, are hesitant to give up the fight for in-kind creations. 

The process of cash creation essentially transfers the responsibility of trading Bitcoin from professional trading firms to authorized participants (APs) like Morgan Stanley and Goldman Sachs. This shift implies reduced competition among issuers, with performance based on which issuer possesses superior resources and trading strategy.

However, the SEC is insisting on cash redemption over in-kind, primarily because the agency presently prohibits broker-dealers such as Robinhood and Fidelity from directly trading spot Bitcoin.

Potential Reasons For Bitcoin ETF Spot Postponements

The SEC’s commission highlights concerns regarding the potential use of Bitcoin for money laundering, market manipulation, and other illicit purposes.

Moreover, SEC Chairman Gary Gensler has yet to offer complete clarity on the actual status of Bitcoin, leaving questions about whether it is a lightly regulated commodity or a security such as stock or bond, requiring the commission’s comprehensive regulatory oversight. Similar uncertainty surrounds the classification of Ethereum.

One of the biggest money manager, BlackRock prioritized obtaining SEC approval for its proposed bitcoin ETF as a key corporate goal, describing Bitcoin as an “international asset” and a “store of value” comparable to gold. 

With over 400 traditional ETFs in its portfolio, BlackRock’s multiple interactions with the SEC, indicate a heightened focus on bringing these ETFs to the market in the new year.

While the SEC could reject all applications, industry insiders consider this outcome unlikely. The DC Court of Appeals vacated the SEC’s denial of crypto asset manager Grayscale’s application to convert its GBTC Trust into a spot Bitcoin ETF earlier this year, with the three-judge panel criticizing the SEC’s actions as “arbitrary and capricious.”

This ruling is seen as a significant precedent that money managers seeking approval for spot bitcoin ETFs may rely on if the SEC rejects their applications.

Disclaimer

In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.

About The Author

Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.

More articles
Alisa Davidson
Alisa Davidson

Alisa, a dedicated journalist at the MPost, specializes in cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a keen eye for emerging trends and technologies, she delivers comprehensive coverage to inform and engage readers in the ever-evolving landscape of digital finance.

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